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Key Points
Broadcom had a solid quarter and raised guidance on legacy and new business strength. 
The shift with VMWare into subscriptions provides a robust outlook for growth in 2024. 
The stock pulled back immediately after the release, but analysts see a double-digit upside for this dividend-paying stock. 
5 stocks we like better than Broadcom
The price action in Broadcom NASDAQ: AVGO shares peaked and corrected ahead of the Q4 release, opening up a buy-the-dip opportunity. The Q4 results were better than expected and came with robust guidance that confirms the uptrend in business and is leading the market higher. The post-release action has the stock price edging lower, contrary to the data, and the analysts’ sentiment is deepening the opportunity for investors. 
Because Broadcom outperforms on the combined strength of legacy and new business, it set record margins, increased the dividend by double-digits and has robust sell-side support, investors may expect to see this stock advance another 20% to 30% from current levels.
Broadcom slips on beat-and-raise quarter, record margin
Broadcom had a solid quarter with no metric providing a reason to fear. The company produced $9.3 billion in net revenue for a gain of 4.1% that outpaced the analysts’ consensus, if only by a slim 20 basis point margin. The salient point is that the legacy semiconductor business is up 3% and better than expected, showing a bit of resilience in the stabilizing semiconductor market. Infrastructure is up 7%; both are supported by rising demand for accelerators and hyperscale solutions for AI. 
The margin news is excellent, with gross margin and operating costs aiding bottom-line strength and cash flow. The net margin improved by 4.9%, and the FCF margin by 5.8% to top 50% of revenue. The adjusted EBITDA margin came in at a record 65%, and the earnings are up more than 5% GAAP and adjusted. The adjusted earnings grew by 5.5% compared to the 4.1% top-line gain and beat the consensus estimate by a dime, and margin strength is expected to continue in 2024. 
Guidance for 2024 is robust compared to the analysts’ estimates. The company expects core growth in the mid-to-high single-digits to be compounded by the VMWare acquisition and lead to a 40% top-line gain. The increase in revenue is expected to carry through to the bottom line with a full-year adjusted EBITDA margin of 60%. That’s down compared to Q4 but potentially cautious, given the Q4 results. The takeaway is that analysts have already begun to issue bullish revisions to their research. 
Broadcom raises dividend; aggressive increases are still expected
Broadcom was expected to increase its dividends, but the company surprised the market with a larger-than-expected increase. The company upped the 2024 payments by 14%, 200 bps stronger than the last increase, and there are signs that distribution growth will remain solid over the next year or two at least. The company’s FCF growth and FCF margin are sufficient to see to that. FCF came in at $4.723 for the quarter for a dividend FCF payout ratio of 40%. 
The company also increased its cash position by 17% YOY and reduced long-term debt. Total assets are down slightly, but long-term leverage is a low 1.56X equity, providing ample financial flexibility and free cash flow. Assuming no major changes in the semiconductor outlook, Broadcom should be able to continue increasing its per-share dividend distribution for decades.
Analysts see strength in Broadcom’s future
The analysts are happy with what they see in Broadcom’s future. While near-term headwinds persist and the VMWare acquisition provides some opacity to the outlook, strength is expected in the 2nd half. Analysts at Summit Insights Group think the company will outperform its guidance for the year and upgraded the stock to Buy. 
The new Buy rating aligns with the consensus Moderate Buy; other analysts are raising their price targets. KeyBanc upped its target to $1000 compared to the $878 consensus, a consensus which suggests the stock is fairly valued at current levels. However, the critical detail about the analysts’ price targets is that they have been steadily revising them higher all year, and many of the most recent have the market trading above $1100 or 20% above current action. 
The technical picture is promising. The market is in a sustained uptrend and showing signs of support at a critical level. Assuming the market continues to support the stock at these price points, it should begin to rebound soon. If not, AVGO may fall to the $850 to $875 region, where it would present an even better opportunity. 
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